Utilities in 2026: The AI Power Play and What It Means for Your Portfolio

For years, utilities were the classic defensive stock-steady, reliable, but not exactly a growth engine. That story is changing fast. The real-world demand for electricity is surging, and the biggest driver is a technology everyone knows: artificial intelligence. Think of it like a city planning a massive renovation. The old blueprint for power was fine for the past, but now they're building a whole new district of data centers, and each one is a power-hungry machine that needs a constant, reliable supply.

This isn't just a future possibility; it's happening now. The rapid build-out of AI data centers is creating a powerful, new source of electricity demand. As one portfolio manager noted, power is the essential "feedstock" for AI servers, and that demand is super-charging the sector. The market has already taken notice. Utilities outperformed the broader U.S. equity market in 2025, with the sector up about 23% year-to-date through November. More strikingly, the Morningstar US Utilities Index gained 22% in 2025 and 70% from its low in October 2023, including dividends. That kind of move, especially from a traditionally slow-growth sector, signals a fundamental shift in the investment thesis.

The evidence is in the deals. Major players like NextEra Energy are securing long-term power deals with tech giants to lock in this future demand, much like signing a 25-year lease. NextEra recently confirmed a 25-year power purchase agreement with Google for power from its Duane Arnold nuclear plant, with plans to develop multiple gigawatt-scale data center campuses together. This isn't just a one-off; it's a strategic bet on decades of sustained demand. The bottom line is that utilities are no longer just keeping the lights on. They are becoming the essential infrastructure providers for the AI boom, and that's what's driving their new growth story.

The Business Logic: Investment, Earnings, and Valuation

The growth story for utilities is built on a simple, expensive equation: massive investment today for future profits tomorrow. To meet the surging demand from AI data centers and other electrification trends, the industry is planning capital spending that tops $1 trillion. This isn't just a minor upgrade; it's like taking out a huge mortgage to build a new factory. The money is flowing into new power plants, grid upgrades, and renewable projects to ensure the lights stay on for the next generation of tech.

This spending is expected to pay off in the bank account. Analysts project 6.5% annual earnings growth for most utilities through 2030, driven by these secular trends. Some companies are on track for even stronger results. For instance, Portland General Electric's $6.4 billion investment plan for 2025-29 should drive annual earnings growth above 6%. Alliant Energy's plan to spend $13.4 billion over four years is also aimed at accelerating growth. The bottom line is that the market is betting that this capital will translate into rising profits, which is the engine for stock price appreciation.

Yet, the math gets tricky when you look at the price. After a spectacular run that saw the sector up 22% in 2025 and 70% from its low in October 2023, valuations have pulled back from summer highs. The sector is now considered fairly valued, but the cushion for error is thin. The average dividend yield is near historic lows at 3%. That's a critical point. For years, a high yield was the safety net for utility investors, a steady cash return even if the stock price stagnated. Now, with that yield so low, there's little protection if the promised earnings growth disappoints.

Put simply, the investment thesis has flipped. Utilities are no longer a yield play; they are a growth story. That means the stock price must deliver on the market's expectations for earnings growth. If companies fall short of the projected 6% or more, the stock could face a sharp drop, as there's minimal dividend income to soften the blow. The capital is being spent, the demand is real, but the financial proof is still in the future. For investors, the focus shifts from the yield in the register to the profit margin on the balance sheet.

Market Talk: What Analysts Are Saying

The prevailing view among analysts is that utilities are no longer just a defensive hold; they are a growth story attracting a new breed of investor. The catalyst is clear: artificial intelligence is reshaping the sector's investment thesis. As Fidelity's utilities fund manager noted, AI is one of the most important trends stoking growth, alongside onshoring and electrification. This shift is drawing in capital from investors who see power and data center adjacent assets as strategic, long-duration plays.

That new investor focus is already showing up in the market for deals. While overall M&A activity in the power sector has cooled, the strategic intent is sharper than ever. Buyers are concentrating capital into fewer, strategically critical platforms tied to grid reliability and long-duration cash flows. The target? Assets that can reliably support accelerating load growth, particularly from data centers. This isn't about random acquisitions; it's about securing the essential infrastructure for the AI boom. Even as overall volume remains subdued, valuations have held firm, showing that the right assets command a premium.

On the ground, the debate is heating up. In a recent podcast, analysts discussed the factors driving power prices, which are climbing as tech companies race to build data centers. The outlook for power generation is bifurcating. There's strong demand for new capacity, with capital expenditure plans topping $1 trillion. Yet, the path to that capacity is complex. The outlook for renewable power and gas plants in key markets will be a major factor in whether utilities can meet this demand without passing on unsustainable costs to consumers.

The bottom line from the analyst community is one of cautious optimism. The AI-driven demand surge is real and super-charging growth expectations. But the sector's ability to deliver on that promise hinges on executing massive, expensive capital plans while navigating a volatile regulatory and pricing environment. For now, the market is betting that utilities can rise to the challenge.

The Regulatory Landscape: A New Set of Rules

The policy environment for utilities is shifting, and the biggest change is a sharp turn away from subsidies. The One Big Beautiful Bill Act, signed into law in July 2025, axed most federal tax credits and incentives for clean energy and electric vehicles. This isn't just a funding cut; it's a fundamental reset. It forces utilities, developers, and manufacturers to pivot fast and rely more on market forces to justify new projects. For the industry, it's a year of reckoning, as one analyst put it, where the old playbook for clean energy investment is effectively canceled.

This creates immediate uncertainty. Without those subsidies, the financial math for many renewable projects becomes much harder to sell. Yet, for utilities, this policy shift also opens a new door. It pushes the focus toward building a more dynamic grid that can harness distributed energy resources-like rooftop solar and behind-the-meter storage-rather than just large, centralized plants. The regulatory push is now on for utilities to become the integrators, turning a patchwork of small-scale power sources into a reliable, flexible system. That role is more valuable than ever, especially as the grid faces a surge in demand from data centers.

The key catalyst for growth in this new environment remains regulatory approval. The path to adding new capacity is still paved with permits and interconnection queues. Large data center loads are seeking to connect to the grid, driving up forecasts and ballooning those queues, particularly in markets like Texas and the Mid-Atlantic. This has led some states to introduce new tariffs to weed out speculative requests, and the federal government is pushing to take a more active role in regulating these connections. The outcome of these battles will be a major factor in whether utilities can meet the surging demand without a costly, speculative overbuild. For investors, the growth story now hinges on navigating this complex, evolving regulatory landscape.

What to Watch: Catalysts and Risks

The AI-powered growth story for utilities is now set in motion, but its success depends on a handful of critical events and risks that will play out over the coming year. The path from promise to profit is paved with regulatory hurdles, market realities, and the ever-present danger of overbuilding.

The most immediate catalyst is the massive backlog of projects waiting to connect to the grid. As data centers race to build, they are flooding transmission queues, particularly in key markets like Texas and the Mid-Atlantic. This isn't just a paperwork delay; it's a direct bottleneck to meeting the surging demand that justifies all the sector's investment. The Department of Energy is pushing federal regulators to take a more active role in managing these connections, setting up a potential power struggle between state and federal authorities. Getting these projects approved and built on time is essential. If the grid can't keep pace, the promised growth in electricity sales will stall, and the stock's growth story will falter.

Yet, the biggest risk is one of timing and scale. Some observers warn that the current frenzy could lead to an unnecessary infrastructure buildout, echoing the tech bubble of the early 2000s. At that time, the energy and tech industries massively overestimated how much power the Internet would need, leaving utilities and ratepayers on the hook for underutilized assets. The same dynamic is feared today. If the most aggressive demand forecasts for data centers don't materialize as quickly as planned, it could create a surplus of new power capacity. That would pressure power prices and make it harder for utilities to recover their massive capital costs, threatening the earnings growth that the stock price now depends on.

A more immediate financial risk is rising energy costs. As utilities spend billions to build new capacity, their own fuel and operational costs are climbing. This puts pressure on their bottom lines and, more importantly, on their ability to raise rates for consumers. Regulators are watching closely, and if inflation and utility costs rise too fast, they may impose stricter limits on how much utilities can pass those costs through to customers. This regulatory squeeze could directly slow the earnings growth that investors are banking on, especially in a sector where the dividend yield is already low and offers little cushion.

The bottom line is that the utility sector is at a crossroads. The catalysts are clear-the need to clear interconnection queues and deliver new capacity. The risks are equally defined-the danger of overbuilding and the threat of regulatory caps on rate hikes. For the AI power play to work, utilities must navigate this tightrope with precision. The coming year will show whether they can turn the promise of data center demand into reliable profits, or if the story unravels under the weight of its own ambition.